Lack of Internet sales tax pits small retailers vs. online giants

As the owner of Changing Hands bookstore in Tempe, Shanks is upset that her company cannot compete with Amazon. Not because the giant online retailer is able to price their products lower, she said, but because the Internet giant’s business model gives it a 10 percent advantage over her at checkout.

When Shanks sells a book, she is required to charge the customer 10 percent in sales tax. But online retailers like Amazon are exempt from having to charge that tax, ultimately making it cheaper for a consumer to buy online rather than from her store.

A 1992 Supreme Court decision ruled that online and mail-order retailers do not have to charge consumers sales tax if the company did not have a presence in the consumer’s state, opening the debate about what exactly constitutes a “presence.” A warehouse? A storefront?

For Shanks and other small business advocates, it’s ridiculous to read about Amazon’s planned 1.2 million square-foot distribution facility, which will be its fourth in the state, but to be told that the company does not have a “presence” in Arizona and therefore does not have to charge sales tax.

“There’s a larger issue now with nexus and what constitutes nexus,” she said. “But when the governor of Arizona stands at the new Amazon warehouse, looking over the X-square feet, this is a business doing business in Arizona.”

In recent years, states have been seeking ways to get around the decision and collect the sales tax revenue they believe is rightly their due. California, for instance, is currently battling Amazon over the right to impose a sales tax on transactions conducted by businesses in California that sell through Amazon; in response, the online retailer cut ties with all associates in the state.

In Arizona, where Amazon has three, soon to be four, so-called fulfillment centers, small business advocates have argued that the company does indeed have a presence in the state and that letting it get away without collecting sales tax creates an inequity in the tax code.

“It’s just patently unfair for a small independent retailer,” said Michele Ahlmer, executive director of the Arizona Retailers Association. “Why should they have to do a sales tax collection if somebody with a 400,000 (square-foot) warehouse in this state does not?”

The situation in Arizona might be even more complicated. A conservative Legislature that ran on fiscal responsibility and not raising taxes plus a muddled tax code may provide obstacles that can’t be easily overcome.

“Right now, you have variations not only from rates, but also the base,” explained Kevin McCarthy, president of the Arizona Tax Research Association. Some cities tax food, for example, but others do not. Those varying bases make it extra complicated for a business to try and figure out what taxes should apply to a purchase.

“That’s where the complications are for many businesses,” he said. “It’s not just on the rate side, but the administrative burden.”

A potential solution, said McCarthy, is to impose one uniform sales tax code throughout the state that’s based on an average rate from all counties and municipalities. But going by an average, he said, would invariably mean that some municipalities’ rates would go up, which could be a political death sentence for the Republicans who hold the majority in the Legislature.

“It would be grounds for someone to take shots to say ‘they raised my taxes here but they decreased taxes here,’” McCarthy said.

Arizona legislators have made some attempt at resolving the issue. A law passed during the 2011 legislative session, through an amendment on

HB 2332, requires that consumers keep track of their Internet purchases and report them on their tax forms.

Supporters said that at the least, the new law was a step in the right direction. But others, like Ahlmer, argue that it isn’t enough.

Shanks said it’s a burden for her to go through the trouble of collecting sales tax from customers and keeping those records while online retailers can shirk that responsibility.

“We don’t want the state of AZ picking winners and losers and deciding who has the onus of collecting sales tax and who does not have to collect sales tax,” she said. “I would love to be able to say to customers, ‘you just bought this $10 book, I’m not going to charge you that $1 sales tax, but you have to report it on good faith at the end of the year.’”

Groups like the National Federation of Independent Business (NFIB) and the Tax Research Association are sympathetic to the plight of small businesses and their competitive disadvantage, but they maintain that any change has to start with the tax code.

Farrell Quinlan, lobbyist for NFIB Arizona chapter, said that even if the state wanted to tax Internet sales, the tax code makes it impossible to do it right now.

“If we’re going to expect online retailers to collect sales tax, it’s got to be something where you type in the zip code and the software figures out the rate,” he said.

Politically, however, tackling the tax code will get sticky. Localities are likely to fight the idea of a uniform code, Quinlan said, based on the argument that it goes against the concept of local control.

Rep. Steve Farley, D-Tucson, said that he hopes to address the issue at the Legislature, but doesn’t expect anything to be done until after the 2012 elections largely because of the anti-tax Republicans in the Legislature.

“Republicans have an ideological problem in that they’ve promised Grover Norquist (president of Americans for Tax Reform) and everyone else that they wouldn’t raise any taxes,” he said. “I don’t have any illusions that we’re going to get this done in an election year, but I think it’s time that we start talking about having the political guts to solve this real problem.”

Not all Republicans in the Arizona Legislature are unwilling to take up the issue. Rep. Justin Olson, R-Mesa, said he’s troubled by the inequity and what it means for small businesses.

Last session, he grappled with a way to level the playing field for Internet retailers and brick-and-mortar stores alike without breaking his promise not to raise taxes. His solution, which was tacked onto his bill as an amendment sponsored by Sen. John McComish, R-Ahwatukee, was to expand the tax base to sales by a retailer with nexus in Arizona to an Arizona resident, but to lower the tax rate across the board in order to make the proposal revenue-neutral.

The overall lowering of the tax rate would help mitigate any increased tax burden on consumers, Olson said. But the amendment was stripped from the bill before it was passed, a move that Olson said demonstrates the resistance in the Legislature to make any move that could be construed as a new or higher tax.

“Even revenue-neutral tax reform along these lines is very controversial, because it is viewed as a tax that doesn’t currently exist,” he said. “There’s a substantial amount of education that would need to take place.”

Nevertheless, Olson said the question of Internet sales and taxation was one that would have to be addressed, and soon.

“Maybe not in the way that we were looking at doing it, but in some way,” he said. “This issue is not going away.”

11 comments

No ones going to mention that people who buy from amazon have to wait for, and pay for shipping? Plus you can’t really evaluate a product before you buy it, so there’s more risk involved.

No, the problem isn’t that Amazon is cheaper, except perhaps for the used goods that stores by and large don’t offer anyway. The problem is that these stores only sometimes sell what people want to buy, and when they don’t they say things like, “well, we can have it shipped in a few weeks and you can pick it up here”. Really? Gee, that’s great. I get wait weeks instead of Amazon’s days for the exact same thing, except I also have to go to the damn store to pick up the order! I also love getting ignored by the person at the register and the often clueless employees.

So, go ahead and by all means have your tax. It won’t help. People don’t buy something online because they can get it maybe 5 dollars cheaper. Or perhaps the stores are overcharging and are upset they can’t get away with it? Taxing Amazon won’t help that either, people will still look up the price online and call bullshit on obvious mark ups.

This article misses one key point. People in Arizona benefit greatly from being able to order online from small independent online retailers. Arizona has lots of small independent online retailers who will be hurt if they have to charge tax to out-of-state customers. If you have a business that offers no advantage to customers by having a brick-and-mortar presence, then you are probably in a dying business. Why penalize Amazon?

The problem with local retailers is they don’t have much enventory. I look but can’t find most of what I buy on-line because there is no other place to find it.
In place of sales tax you have shipping charges, many times that is more than the cost of the product you need.
Retailers, even large ones, are putting themselves out of business because of this and poor service ,long lines to check out of a store etc.

Why not partner with Amazon to some degree to take advantage of their market share? Taxation won’t level the playing field…aren’t we as recession-era consumers being taxed enough? Small retailers can fill the vacuum presently being abandoned by mega-chains like Borders. Overexpansion of those retail giants seems to be reaching an end in its life cycle. The time seems ripe to step up, no?

speaks volumes regarding the Obama administration’s misjudgment with the Fiscal Commission. Demands for the Commission arose from the 2008 book/movie I.O.U.S.A. highlighted: the Leadership, trade, savings and budget deficits; the first three being the most middle class relevant and root causes of the budget deficit, the tip of the iceberg. The ATR’s pledge signers (not permitted to negotiate in good faith) limit the focus only to spending, throwing middle class relevant deficits under the bus and allow ATR to be the Puppet Master of a deficit shell game.

All you folks that say Amazon out competes local independent brick and mortar retailers based on selection and pricing are correct. Amazon is an amazing business and is a compelling place to shop on those grounds alone. However, that totally misses the point of the issue at hand. Why should one retail business with a physical presence in our state be exempted from having to collect sales tax while other retail businesses are required to collect sales tax? There is no justifiable reason for the exception. Requiring Amazon to adhere to the same law as other businesses with a physical presence in this state is NOT a new tax. It’s merely equal enforcement of a tax collection law. By exempting Amazon from collecting sales tax in AZ, our government is effectively subsidizing an approximately 9% discount over competing local businesses. Let Amazon compete on the same playing field with regards to sales tax collection.

I happen to own a local retail business which is both brick and mortar and online. If a customer in AZ orders an item through my website I am required to collect and remit sales tax. If that same customer orders the same item from amazon.com and it’s shipped from a distribution center in AZ they do not get charged sales tax, resulting in a 9% difference in bottom line price. How can anyone argue that that is an acceptable way to operate a business climate in our state? It’s totally absurd. I am happy to compete against Amazon and other online businesses on an equal playing field as far as taxes are concerned. We each have pros and cons that customers can decide on their own where they prefer to shop. But don’t have our government get into the business of picking winners and losers by granting illegitimate tax collection exemptions to certain businesses.

Any small businesss-owner such as Lance will not be able to get around the Sales Tax loophole that Amazon has.

If Amazon has a facilty in AZ then of course they should be charging Sales tax to any AZ purchaser just like the rest of AZ businesses.

Think about what the Sales Tax is suppossed to be doing!
It is paying for services the state provides to those living / working in the state!

If any company has buildings or workers based in the state they should be collecting sales tax on behalf of the State for any in-state purchase. Why would the Politicians allow tax law be manipulated to protect large companies that are obviously breaking the intent of State Tax law?

There seems to be some confusion, on my part at least, regarding this sales tax issue. If Amazon is not taxing it’s Az customers and shipping from it’s Az facility, that’s plain wrong. I agree with Lance, above, and I also sell both locally and on-line accross the country. When I sell my goods to an Az. resident, I charge the local sales tax, in this case Scottsdale, because this is where the transaction takes place. When I sell to an out-of- state resident, according to the court ruling above, I do not charge sales tax. I agree with John Alexander, above that local sales tax should be levied to in state purchases. If Amazon is ducking this responsibility, they need to be forced to comply with all Az merchants requirements and collect and pay the sales tax.

I am also an AZ retailer online and all the other whining local retailers make me sick. The difference is according to the law you cannot walk into Amazon and make a purchase and walk out of the store with your product. They do not have a brick and mortar store. In your store the customer can walk out with the product without waiting. Sorry I don’t believe in taxing someone who is abiding by the law to make it equal to others. Sounds like the Obama Healthcare plan. Sorry, you all need to find a new business model to compete or sell something else. I offer my local customers 10% off. Sure I don’t make as much money on those sales, but I am making the sales that if I might not have if the tax was the reason they did not purchase. In the end keep whining and when Amazon closes up shop here like they dumped their retailer in CA then you can whine because the jobless rate just went up in AZ.